INTERNATIONAL JOURNALS OF ACADEMICS & RESEARCH ISSN: 2617-4138 IJARKE Business & Management Journal DOI: 10.32898/ibmj.01/3.3article02 www.ijarke.com 8 IJARKE PEER REVIEWED JOURNAL Vol. 3, Issue 3 Feb. – Apr. 2021 Effects of Capital Structure Composition on Financial Performance of Manufacturing Firms Listed at the Nairobi Securities Exchange in Kenya Michael Ogola Oyugi, Kisii University, Kenya Dr. Chesoli Wafula, Kisii University, Kenya Prof. Christopher Ngacho, Kisii University, Kenya 1. Introduction The firms’ main objective is to maximize its profits and in the same time minimize its costs, when companies search about resources to finance their investments, they take this objective into consideration. The main sources that firms could use to provide the necessary finance are the internal finance which is equity, and the external finance which is debt. Most of companies use a mix between equity and debt which form the capital structure (Nassar, 2016; Ogenche, Githui and Omurwa, 2018). In her research, Ogenche, Githui and Omurwa (2018), quoted Nwaolisa and Chijindu (2016) that a company’s capital structure is arguably one of its most important choices. From a technical perspective, the capital structure is the careful balance between equity and debt that a business uses to finance its assets, day to day operations, and future growth (Nwaolisa and Chijindu, 2016; Ogenche, Githui and Omurwa, 2018). From a tactical perspective however, it influences everything from the firm’s risk profile, how easy it is to get funding, how expensive that funding is, the return its investors and lenders expect, and its degree of insulation from both microeconomic business decisions and macroeconomic downturns (Nassar, 2016; Ogenche, Githui and Omurwa, 2018). The major areas for decision making in a firm are financing and investment. Financing decision entails the manager’s concern the determination of the right financing mix or optimal capital structure for the firm (Karani, 2015; Ogenche, Githui and Omurwa, 2018). Capital structure decisions are considered to be a vital managerial decision as it influences the shareholder risk and return (Kubai, 2016). Muthama, Mbaluka and According to Kalunda (2013), capital structure constitutes the permanent financing such as long-term debt, preference stock, and shareholder equity. Capital structure concept can also be defined as the relationship between the various forms of financing. Hence, the term signifies the proportion between equity and debt capital that some firm targets to attain as part of the firm’s objectives (Naveed et al., 2010; Kubai, 2016). INTERNATIONAL JOURNALS OF ACADEMICS & RESEARCH (IJARKE Business & Management Journal) Abstract The purpose of the study was to examine the effect of Capital Structure Composition on financial performance of manufacturing firms listed at NSE, Kenya. The study specific objectives were; to determine the influence of retained earnings on financial performance, to examine the influence of firm liquidity on financial performance, to examine the influence of equity financing on financial performance, to examine the influence of debt financing on financial performance and to assess the role of firm size as a moderating variable between capital structure composition and financial performance of manufacturing firms listed at the NSE, Kenya. The study was guided by the Modigliani and Miller (MM) theory (1963), Pecking order theory, Trade-off theory, Agency Theory and Shiftability Theory. The study used a descriptive research design while employing a census method since the scope of the study covered only seven (7) firms as per the CMA records under the manufacturing and Allied sector at the NSE. Data for the variables was obtained through downloading the audited and published financial statements of the listed manufacturing firms covering the period 2013 to 2019, as approved by the capital Markets Authority. Analysis of the study data was carried out using the statistical Package for Social Sciences (SPSS v 23) and Microsoft excel spreadsheet in line with the study objectives. The financial ratios used from the data were computed and their analysis done using both inferential and descriptive statistics tools. The Return on Assets ratio was used to measure the firm’s financial performance with the formulation of multiple regression analysis to establish the effect of capital structur e on financial performance of listed manufacturing companies on the NSE. The study findings indicated that capital structures positively and significantly influenced financial performance. Further, the results show that firm size positively had an effect on the relationship between capital structures and return on assets. The study findings recommended that there is need to use retained earnings for the consistency in their financial performance since retained earnings, equity financing, Firm liquidity and debt financing had a significantly positive influence on financial performance. Also, firms should continue investing in the both current and fixed assets to broaden the size of the firms. Key words: Capital Structure, Financial Performance, Nairobi Securities Exchange